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Another meal, cooked to a familiar recipe

Author: Andrew Strickland

Published: 04 May 2022

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Patel, Venkataraman and Others v HMRC

This case is the third in a series, dealing with the abuse of gift aid tax relief for the purposes of reducing income tax liabilities. The previous cases decided by the Tax Tribunal were N Green v HMRC and J Netley v HMRC. In the previous cases the settlements appeared, to my eyes at least, surprisingly generous to the taxpayers.

The main ingredients in these cases are:

  • The issue of shares at par by a new company (Newco) to the organisers of the arrangements;
  • Taxpayer clients are issued shares in Newco at a significant premium;
  • Newco acquires a subsidiary undertaking, normally of modest consequence;
  • Newco is floated on the Channel Islands Stock Exchange (CISX) or on AIM shortly before the tax year end;
  • The quoted price of the shares on those markets is very significantly greater than the net asset value of Newco;
  • This price is demonstrated by two share transactions involving small parcels of shares almost immediately after the float;
  • The shareholders gift parts of their shareholdings to unsuspecting charities;
  • The shareholders claim tax relief on those gifts at the inflated prices;
  • There are no further transactions in the shares in the ensuing period and the shareholdings remain wholly illiquid.

This latest case had additional spice to flavour the mix: the schemes were organised by the unlamented Vantis Tax; two of the main instigators, Roy Faichney and David Perrin, were imprisoned for tax fraud.

The Tax Tribunal decided to deal with four companies at one sitting. It has been reported that these companies involved some 600 clients of Vantis. This article focuses on one of these companies, Clerkenwell Medical Research plc.

If we consider some of the above ingredients, we can draw some immediate conclusions:

  • As shares are issued at par to organisers and at a premium to the taxpayer clients, the normal expectation would be that the shares held by the taxpayer clients would be worth somewhat less than the price paid, unless the organisers were bringing commercial value to the entity;
  • When the proceeds of the share issue were used to acquire a subsidiary, or other assets, this would not vary the above conclusion, unless Newco managed in some way to make a bargain purchase;
  • If the organisers charged fees to Newco, in addition to having an equity stake, this would further diminish the value of the shares;
  • The costs of the Placing Memorandum and the float would reduce the net asset per share further;
  • The act of putting illiquid shares onto CISX or AIM does not enhance their value or improve their liquidity in any meaningful way unless there is an active market in those shares. If there is no active market, the companies are, in essence, no different to shares in private companies.

With this group of companies the ingredients included some significant charges from Vantis Tax; the decidedly fishy flavour was enhanced by Clerkenwell purporting to buy some software from a Channel Islands Trust for £500,000. This appeared as an asset on its balance sheet at 30 June 2005. Rights to use this software were then sold after 30 June 2005 to the other related companies involved in the Tribunal Hearing.

It seems that the Trust was a figment and that this transaction was a sham; the funds finished up in the hands of Mr Faichney and Mr Perrin.

We can look at the June 2005 consolidated balance sheet of Clerkenwell with two differing assumptions regarding the value of the software, but assuming that all else is as presented:


Face value (£'000) Reality (£'000)
Software
550 50
Other intangibles
9 9
Debtors 65 65
Cash  357 357
Creditors
(87) (87)
Net Assets
894 394



Number of shares 93,943 93,943
Net asset value per share
0.9p 0.4p

The taxpayer clients had subscribed for the shares at 3p per share. Even at face value, the asset backing was now less than 1p. It seems likely that the position in March 2005, when the shares were put onto CISX and gifted to charities, was very similar to this.

The reduction in value from 3p to 0.9p reflected the dilution effect of the shares issued to the founders at 0.1p and the various charges, including those involved in putting Clerkenwell onto CISX.

As Clerkenwell sold on rights to the software to three other companies, the diminution in value of the Clerkenwell shares was rather less than stated above.

The gift aid claims were based on a market value of £1 per share in Clerkenwell.

There was oral evidence given by a valuer acting for HMRC. He made the following points:

  • The share price in each of the Companies increased significantly in a “matter of a couple of days after their listing on the CISX.”
  • There were, “no announcements or new information or any other rational explanation for the increase in the values of the shares.”
  • In all instances, the two to three days trading that resulted in significant increases in the share prices were followed by no further trading in each of the Companies shares for some period of time.
  • “One of the principal assets of each of the [Companies] were their rights in the Software. However, … in my opinion, I consider that it is for the Tribunal to determine whether an Investor would have sufficient information to determine the actual market value of the Software.”

It is therefore clear that the true value of the software, purported to be purchased from the Richardson Channel Islands Trust, and the level of knowledge assumed to apply for the valuations, were pivotal points in the valuations of the various companies.

In his valuations the expert used the adjusted cost approach for the software. This does appear to be the valuation approach most applicable overall to a newly assembled group.

The Tribunal took considerable comfort from the statements made by the expert in his report regarding his responsibilities as an expert witness. They were fully persuaded by his various arguments as to the values involved.

The Tribunal were presented with two ranges of values for the Clerkenwell shares in March 2005:

  • 0.8p to 3p if the transaction was informed with true knowledge of the value of the software;
  • 1.2p to 3p if the transaction was not informed with this knowledge.

The Tribunal had heard enough: they decided that the value of the shares in Clerkenwell at March 2005 were 0.8p. At the same time they decided that the values of the shares in the other companies were also the lowest figures as offered to them.